Malaysia – Uncertain politics shroud vibrant tech eco-system

Summary

Venture capitalists and other tech investors have been bypassing Malaysia in favour of Singapore and Indonesia, but the country remains Southeast Asia’s third largest market for start-ups as measured by deal numbers and value. (source: Google, Temasek)

The concerns about Malaysia are understandable, given the ongoing 1MDB scandal where Prime Minister Najib Razak and people close to him are alleged to have siphoned billions of dollars from the fund. The transactions are the subject of investigations in several countries, including the United States, Switzerland and Singapore.

Malaysia’s brain drain has also been widely reported, adding to concerns about the availability of skilled labour; while racial tensions are simmering amid Prime Minister Najib’s efforts to rally his rural Malay-Muslim political base against opposition parties that draw part of their support from the ethnic Chinese minority.

The problem is worsened by the growing influence of extremists in the Muslim-majority country.

But despite the bleak socio-political environment, Malaysia’s tech eco-system remains relatively robust and the country continues to produce a steady stream of promising start-ups.

Ride hailing firm Grab, Uber’s main competitor in Southeast Asia, hailed from Malaysia although it has since moved its headquarters to Singapore.

Other prominent Malaysian founded start-ups include regional real estate portal iProperty, recently sold to News Corp in a deal worth US$413 million, and Southeast Asia’s largest online employment company Jobstreet.com, which Australia’s SEEK Ltd bought in 2014 in a deal worth US$523.5 million.

KFit, which links fitness buffs with gyms, spas and other wellness centres, is another up-and-coming player. KFit has ventured outside Malaysia and is now present in Singapore, Taipei and Manila.

In the bio-medical space, Malaysia has produced successful firms like Sengenics, a genomics-based research and diagnostics services company which is now headquartered in Brunei.

According to an annual global innovation ranking compiled by business school INSEAD and the World Intellectual Property Organization (WIPO), Malaysia ranked 32nd among countries globally — behind Singapore, Hong Kong, South Korea and China, but ahead of India and Southeast Asian neighbours Indonesia, Thailand and the Philippines.

The 2015 Global Innovation Index report described Malaysia, an upper middle income country, as an “innovation outperformer” with scores comparable to some high income countries.

Malaysia also attracts entrepreneurs and companies from the region due to its lower cost and relatively efficient infrastructure, notwithstanding its affirmative action policies in favour of majority Malays that have prompted hundreds of thousands of its citizens to move abroad.

One migrant to Malaysia is the Catcha Group, which was originally based in Singapore. Catcha is one of the largest tech investors in Malaysia, having built or seeded several companies that have gone public in either Australia or Malaysia. A measure of the firm’s influence was the appearance of Prime Minister Najib as a surprise guest during a start-up conference hosted by the company in June this year.

Reasons for the vibrant tech eco-system includes Malaysia’s entrepreneurial urban workforce and private sector that is dominated by small and medium enterprises.

The country’s huge diaspora – a consequence of the brain drain – provides start-ups with linkages to technology hotspots in the United States and Australia as well as financial centres like Singapore and Hong Kong.

Entrepreneurs Demystify Asia spoke to said it’s easier to employ mid-level computer programmers in Malaysia compared to Singapore, due to the government’s more relaxed immigration criteria for tech workers from abroad.

Oxford-educated Yuen Tuck Siew, CEO and co-founder of Malaysian start-up Jirnexu, said that while Malaysia lacks Indonesia’s huge population , the market is large enough for start-ups to scale to a decent size. “The infrastructure is good, perhaps not as good as Singapore’s but enough to operate efficiently.”

Mr Siew returned to Malaysia in 2010 to join the Redberry Group, which owns Malaysia’s oldest newspaper, the Malay Mail, and provides a range of outdoor and indoor platforms for advertising.

For start-ups planning to use Malaysia as a launch pad for the region, the advantages include tax breaks and possible seed funding from Malaysian authorities as well as an English-speaking urban workforce whose wages are roughly one-third that of Singapore’s.

 

Table 1:  SEA Deals by country (2015)

 

No of deals Deal value (US$ million)
Singapore 131 820
Indonesia 96 188
Malaysia 50 49
Philippines 28 28
Vietnam 26 35
Thailand 24 26

 

Activity in Singapore was driven by two large investments involving Grab (estimated US$350m) and PropertyGuru (US$130m)

 

Source: Google, Temasek report entitled “e-conomy SEA: Unlocking the $200B Digital Opportunity” published on 27 May 2016

 

 

 

Table 2: Malaysia at a glance (2015 unless otherwise stated)

 

GDP: MYR1,159 billion in current terms (about US$284 billion)
GDP per capita: US$11,307 (2014)
Population: 31.4 million
Ethnic mix: Bumiputera (mostly Malay-Muslims) (67.4%), Chinese (24.6%), Indians (7.3%)
No of Internet users: 22 million
Size of start-up economy: 20,000 people in 1,000 start-ups
Average internet download speed: 7.3 Mbps
Unemployment: 3.5%
Top ranked university: University of Malaya

#27 in Asia according to QS University Rankings: Asia 2016

Bumiputera means sons of the soil, a term that encompasses Malays and other indigenous ethnic groups like the Dayaks and Kadazan and Dusan from the East Malaysian states of Sabah and Sarawak.

 

Source: Statistics Malaysia, World Bank, Catcha Group

 

 

Key Government Agencies and Incentive Schemes

 

Government support of innovation in Malaysia dates back to the 1980s, when the country tried to build a manufacturing sector to emulate the success of Japan and the Asian Tiger economies of South Korea, Taiwan, Hong Kong and Singapore.

 

Much of the funding of research and development (R&D) activities and development of human capital in the tech space comes under the Ministry of Science, Technology and Innovation (MOSTI).

 

For tech start-ups and their investors, the key government agencies include:

 

MaGIC

THE Malaysian Global Innovation & Creativity Centre (MaGIC), whose mission is to help nurture high growth start-ups with the potential to succeed on a regional or global scale. MaGIC was created in 2014 and its roles include providing seed funding and low-cost co-working space, organising courses, running accelerator programmes and helping match start-ups with potential investors and partners.

 

MaGIC also serves as a one-stop shop for start-ups and investors who want to connect with the various government agencies.

 

Cradle Fund

The Cradle Fund is an agency under the Ministry of Finance that provides grants and seed funding to Malaysian start-ups. These include a technology commercialisation fund that provides entrepreneurs with up to MYR500,000 (around US$122,000) in funding to bring their products into the marketplace.

 

Cradle also manages a scheme whereby angel investors can enjoy a tax deduction of up to MYR500,000 off their personal income tax when they invest in Malaysian technology start-ups.

 

MSC Malaysia Status

MSC Malaysia status, which is offered through the Malaysia Digital Economy Corp (MDEC), provides technology companies setting up operations in Malaysia with various incentives including exemption from local ownership requirement and a tax holiday of up to 10 years. Companies with MSC status are also free to employ skilled workers from overseas and enjoy tax-free imports of multimedia and other tech equipment.

 

Beginning 2015, a scaled-down version of MSC Malaysia was introduced for start-ups that allows them to enjoy many of the perks given to such companies plus the freedom to set up anywhere within Malaysia. This is unlike regular MSC status that requires recipients to base their operations in designated cybercities and cybercentres around the country.

 

Useful links:

Malaysian sites

Malaysian Global Innovation & Creativity Centre (MaGIC): http://mymagic.my/en/

http://www.mscmalaysia.my/

Cradle Fund: http://www.cradle.com.my/

MSC status for start-ups: http://www.mscmalaysia.my/msc4startups

Department of Statistics: https://www.statistics.gov.my/

Catcha Group: http://www.catchagroup.com/

 

Global sites

Global Innovation Index Report: https://www.globalinnovationindex.org/content/page/GII-Home/

World Bank report on Malaysian brain drain: http://documents.worldbank.org/curated/en/2011/04/14134061/malaysia-economic-monitor-brain-drain

Google, Temasek Holdings report on Southeast Asian e-commerce

http://apac.thinkwithgoogle.com/research-studies/e-conomy-sea-unlocking-200b-digital-opportunity.html

Institute of Southeast Asian Studies reports on Malaysia

https://www.iseas.edu.sg/medias/event-highlights/item/3196-seminar-on-has-malaysian-islam-been-salafized

https://www.iseas.edu.sg/images/pdf/ISEAS_Perspective_2016_24.pdf

 

 

 

 

 

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